“Severance pay” is compensation that is paid to a qualified employee who has his or her employment “severed.” It compensates an employee for losses (such as loss of seniority) that occur when a long-term employee loses his or her job.

Severance pay is not the same as termination pay, which is given in place of the required notice of termination of employment.

When Severance Occurs

A person's employment is "severed" when their employer:

dismisses or stops employing the employee, including where an employee is no longer employed due to the bankruptcy or insolvency of his or her employer;

"constructively" dismisses (please refer to "Constructive Dismissal" in the "Termination of Employment" section of the Guide) the employee and the employee resigns in response within a reasonable time;

lays the employee off for 35 or more weeks in a period of 52 consecutive weeks;

For the purposes of the Severance provision, an employee who receives less than one quarter of the wages he or she would have earned at the regular rate for a regular work week is considered to have been on a week of layoff. A week of layoff does not include a week when the employee is unavailable for work, unable to work, suspended for disciplinary reasons, or not provided with work because of a strike or lockout at his or her place of employment or elsewhere. Although the 52 weeks are consecutive, the 35 weeks do not have to be consecutive.

lays the employee off because all of the business at an establishment closes permanently (an "establishment" can, in some circumstances, include more than one location); or

gives the employee written notice of termination and the employee resigns after giving two weeks' written notice, and the resignation takes effect during the statutory notice period.

Employee Resigns After Receiving Notice of Termination

An employee who has been given a written notice of termination can resign and continue to keep the right to severance pay. To keep this right, the employee must give the employer two weeks' written notice of his or her resignation. The resignation must also take effect during the statutory notice period–the period of written notice that is required to be given by the employer.

If an employer provides longer notice than is required, the statutory part of the notice period is the last part of the period that ends on the date of termination.

Example

Heather has worked for seven years, and is entitled to seven weeks' notice of termination under the ESA. Heather's employer gives her 10 weeks' notice. Heather must give her employer at least two weeks' written notice of her resignation. As long as Heather's resignation takes effect during the statutory notice period, in this case the last seven weeks of the 10-week notice period, she continues to be entitled to severance pay.

Qualifying for Severance Pay

An employee qualifies for severance pay if his or her employment is severed and he or she:

has worked for the employer for five or more years (including all the time spent by the employee in employment with the employer, whether continuous or not and whether active or not)
and

his or her employer:

has a payroll in Ontario of at least $2.5 million;or

severed the employment of 50 or more employees in a six-month period because all or part of the business permanently closed.

Amount of Severance Pay

To calculate the amount of severance pay an employee is entitled to receive, multiply the employee's regular wages for a regular work week by the sum of:

the number of completed years of employment;and

the number of completed months of employment divided by 12 for a year that is not completed.

The maximum amount of severance pay required to be paid under the ESA is 26 weeks.

Calculating Severance Pay

Example: A regular work week

Susan regularly works 40 hours a week and is paid $15.00 an hour. Her employer has a payroll of more than $2.5 million. Her employer gives Susan seven weeks' notice of termination, and Susan works for the notice period. At the end of the notice period, Susan's employment is severed. On that date, Susan has been employed for seven years, nine months and two weeks.

Here's how to calculate Susan's severance pay entitlement.

Calculate Susan's regular wages for a regular work week.
Susan usually works 40 hours a week × $15.00 = $600.00

Number of Susan's completed years = 7

Divide the number of complete months Susan was employed in the incomplete year by 12.
Susan worked 9 complete months ÷ 12 = 0.75

Add the number arrived at in Step 2 (7) to the number arrived at in Step 3 (0.75),
7 + 0.75 = 7.75

Multiply Susan's regular wages for a regular work week ($600.00) by the number arrived at in Step 4 (7.75).
$600.00 × 7.75 = $4,650.00.

Result: Susan is entitled to $4,650.00 in severance pay.

A special method of calculating severance pay is used for employees who are paid on a basis other than time worked.

Example: Employee paid on a basis other than time worked

Kwesi works as a commission salesperson at his employer’s high-tech retail store. He is paid commissions on sales made and not on the basis of time worked.

Kwesi's employer decides to downsize and Kwesi is given eight weeks' written notice of termination of employment. He works the notice period and his employment is severed. On the date his employment is severed, he has been employed for nine years, six months and three weeks.

Kwesi's employer has a payroll of more than $2.5 million. In the last 12 weeks of his employment, Kwesi has received $7,723.00.

To calculate Kwesi's severance pay entitlement.

Calculate Kwesi's "regular wages for a regular work week"-the average of the regular wages he received in the weeks he worked during his last 12 weeks of employment.

$7,723.00 ÷ 12 = $643.58

Number of completed years = 9

Divide the number of complete months Kwesi was employed in the incomplete year by 12

Kwesi worked 6 complete months ÷ 12 = 0.5

Add the number arrived at in Step 2 (9) and the number arrived at in Step 3 (0.5) 9 + 0.5 = 9.5

Multiply Kwesi's regular wages for a regular work week ($643.58) by the number arrived at in Step 4 (9.5)
$643.58 × 9.5 = $6,114.01.

Result: Kwesi is entitled to $6,114.01 in severance pay.

When to Pay Severance Pay

An employee must receive severance pay either seven days after the employee's employment is severed or on what would have been the employee's next regular pay day, whichever is later.

However, an employer may pay severance pay in installments with the written agreement of the employee or the approval of the Director of Employment Standards, Ministry of Labour. An installment plan cannot be for more than three years. If an employer fails to make a scheduled payment, all of the employee's severance pay becomes due immediately.

Exemptions from Severance Pay

Many of these exemptions are complex. Please contact the Employment Standards Information Centre, 1-800-531-5551, if you need help with these exemptions. Please also refer to the Special Rule Tool.

An employee is not entitled to severance pay if he or she:

has refused an offer of "reasonable alternative employment" with the employer;

has refused "reasonable alternative employment" that is available to the employee through a seniority system;

has his or her employment severed and retires on a full pension recognizing all years of service that would have been worked in the normal course. (Canada Pension Plan benefits do not qualify.);

has his or her employment severed because of a permanent closure of all or part of the employer’s business that the employer can show was caused bythe economic effects of a strike;

is employed in construction, including employees who are working off-site and who are commonly associated in work or collective bargaining with employees who work at the construction site;

is employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works;

is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and was not condoned by the employer; or

has lost his or her employment because the contract of employment is impossible to perform or has been frustrated by an unexpected or unforeseen event or circumstance. This does not include bankruptcy or insolvency or when the contract is frustrated or impossible to perform as the result of an injury or illness suffered by an employee.

Recall Rights

A "recall right" is the right of an employee on layoff to be called back to work by his or her employer under a term or condition of employment. If an employee is entitled to both termination pay--because of a layoff of 35 weeks or more--and severance pay, he or she must make the same choice for both. Please refer to "Recall Rights" in the "Termination of Employment" chapter.

Wrongful Dismissal

The rules under the ESA about termination and severance of employment are minimum requirements. Some employees may have rights under the common law or other legislation that give them greater rights than notice of termination (or termination pay) and severance pay under the ESA; because such rights generally cannot be enforced under the ESA, some employees may choose to sue an employer in a court for “wrongful dismissal” or pursue other options. Employees should be aware that they cannot sue an employer for wrongful dismissal and file a claim for termination pay or severance pay with the ministry for the same termination or severance of employment; an employee must choose one or the other. Employees may wish to obtain legal advice concerning their rights.